IndiGo IPO: Analysts upbeat on perfect timing but negative net worth raises concern : First Post

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After the debacle of the now grounded Kingfisher Airlines three years back, the public issue of InterGlobe Aviation's IndiGo, which begins today, will stand the test of investors who have in the past burned their fingers by taking bet on some of the currently listed aviation peers.

Although things have not changed much for the aviation industry in the last few years, analysts, however, are upbeat about this low-budget carrier's IPO prospects considering the company's ability to consistently churn out profits over the last few years even as its counterparts continue to struggle on the back of high debt and unsustainable business model.

]Reuters

With domestic economy showing signs of uptick and international oil prices at record lows for the past one year or so, industry experts feel the timing of the IndiGo's IPO could be near perfect.

The company, which is looking at raising up to Rs 3,268 crore at a price band of Rs 700-765 a share through the initial public offer route, is hitting the primary market starting today and scheduled to close on October 29. Already being touted as the biggest IPO of 2015, the company is aiming at a valuation of around $4 billion or Rs 26,000 crore.

According to brokerage views published on the Moneycontrol website, analysts are upbeat about the public issue and have indicated the price band is reasonable.

Angel Broking has recommended 'subscribe' to the issue as it believes that valuation of Interglobe is justified, considering the opportunity present in the vastly underpenetrated Indian air travel market. "Interglobe is better placed than its peers to capture higher market share on the back of its proven Management track record, continuous fleet addition and with its sustainable profitable business model," it says in a report.

Similarly, brokerage firm Anand Rathi, too, has suggested 'subscribe' call for investors on a short and medium term basis. The brokerage feels Indigo's market leadership position, cost competitiveness, and a low-cost carrier (LCC) business model along India's aviation potential makes it one of the consistent performer and growing potential in this industry.

"On valuation front company is trading at 6.8xs EV/EBITDA and 1.6xs EV/Sales for FY16. Also on annualised basis earning in FY16 comes around 10 which is reasonable. It is also India's only profitable airline and has been like that for the past five years, in an industry plagued with high costs and tait says," the report said.

Impressed by single model fleet, well negotiated maintenance contracts, capital light business model (using operating leases primarily), better utilisation rates and low average age of its aircraft fleet, Ajcon Global has also recommended 'subscribe' to Interglobe IPO.

However, select domestic brokerages find valuation to the rich and raised concern over the company's negative net worth. Ahead of the IPO, several media reports highlighted that InterGlobe's net worth (total assets minus total liabilities of a company) slipped into a negative Rs 139 crore at the end of June 2015. The company, however, clarified that the airline's net worth is back in positive in the September quarter.

ICICIdirect.com said the company's valuation commands a premium over select global peers that are trading at average EV/sales of 1.5 times and EV/EBITDA of 9.3 times. "The proposed issue price band of Rs 700-765 implies an EV/EBITDA of 13.6-14.8x and EV/sales of 1.8x-2.0x, which, we believe, factors in all major positives of lower than industry cost structure, low crude prices and sustained mid-teen ASK growth," it reasons.

Further SP Tulsian of SPTulsian.com has not recommended 'subscribe' on concerns of current assets, current liability, negative networth, dividend payment and lack of consistency.

"How can a negative networth company have a cash in balance? It has a consistent liability of Rs 3200 crore. In FY12 profit before tax fell around 90 percent (Y-o-Y), while in FY14 PBT slipped 50 percent (Y-o-Y) due to forex. FY15 and Q1FY16 have been robust only because of crude. So, the airline company is vulnerable to operating lease of aircraft, crude and forex,” he says in an interview to CNBC-TV18.

Also, IIFL in its report said,"Promoters have withdrawn all of the net worth year-after-year in the form of dividends leaving no retained earnings as on 30th June 2015. So while operating efficiency of the airline is high, investors get balance sheet with negative net worth and net debt of Rs 1,300 crore. Their post IPO money will fund all expansion. In this context, valuation at EV/ sales of 1.9x-2.1x, leaves little on the table for retail investors.

Despite some of the impediments, IndiGo has been the only consistently profitable airline in the country for the last seven years. In April-June quarter, the company posted a net profit of Rs 640.44 crore. During the same period, total revenues stood at Rs 4,317.19 crore. For the year ended March 2015, the carrier recorded a net profit of Rs 1,295.58 crore on revenues of Rs 14,309.14 crore. As of December 31, 2014, it had a total indebtedness of Rs 4,002.8 crore and Rs 2,474.6 crore of net debt (net of free cash of Rs 15,28.2 crore).

The company, which started operations in 2006, has witnessed rapid uptick in its overall performance, and hence commanding almost 40 percent market share in the domestic market.